Uncertainty reigns in soybean market

There’s currently a lot of uncertainty in the soybean market, and producers might want to consider protecting themselves before next spring, says Delton Gerloff, University of Tennessee agricultural economist.

“We’re on the threshold where we really have a lot of uncertainty in the soybean market. There appears to be more downside risk to pricing at this time,” says Gerloff. “Once ports reopen and grain starts moving, basis should strengthen. But the underlying market price still may have another 50 cents to fall. The contract low of $5.20 is a possibility.”

Farmers facing much weaker basis should consider storing and contracting for January delivery, he adds. “Prices in some areas are 75 cents per bushel higher for January cash delivery compared to current prices. The challenge in some areas will be to find local storage,” he says.

In the longer-run, as long as ending stocks don’t rise much above 205 million bushels, prices could rebound after the first of the year, says Gerloff. An active export market, he says, likely will be the key, especially if domestic crush can equal last year’s 1.7 billion bushels.

“I think we’ll end up below 205 million bushels in ending stocks, but it probably will come after harvest. I have some optimism about prices next spring. Soybeans are notorious for late April, May and early June price hikes. With a fairly decent crop this year, we’re knocking down our stocks to 205 million bushels. But even at 205 million bushels, we’re not running out of soybeans,” he says.

To a large extent, says Gerloff, carryover stocks determine farm-level prices. When U.S. stocks sank to 112 million bushels in 2004, prices rose dramatically, averaging $7.34 per bushel for the 2003-04 marketing year.

“In the previous year, in 2003, stocks were at 178 million bushels, and the marketing average price was only $5.53 per bushel. The difference in the two stock levels was only 66 million bushels or less than a bushel per acre in the U.S. average yield,” he says.

This illustrates, says Gerloff, that the production margin between historically high prices and near-loan rate prices is not large. But production is not the only determinate of stock levels, he says, as illustrated by the 2004-05 marketing year.

“The March USDA supply/demand report projected carryover stocks on Sept. 1, 2004, to be 410 million bushels. By August, that projection had dropped to 300 million bushels. The drop was due mainly to the domestic crush projection rising 35 million bushels over the same time period,” he says.

New crop stock projections also fell, says Gerloff. By September, ending stocks were projected to be 205 million bushels. The drop in new crop stocks came mostly from stronger demand and fewer acres compared to the March report, he says.

“The lower than anticipated stock levels have not sent prices higher. In fact, prices generally have trended lower throughout the summer, following seasonal trends. The added market risk of the lower stock levels — along with risk premiums — likely have kept prices higher than would have been seen if original stock projections had materialized. But even a pessimistic final new crop yield and optimistic demand scenario for 2005-06 likely would keep prices well below those levels seen only two years ago.”

Also, says Gerloff, the impacts of lower basis along the Gulf Coast due to the aftermath of Katrina still are playing out. Some river port locations were near 50 cents below the historical average basis in September.

“Unless or until river traffic resumes, weaker than normal basis levels can be expected. With prices entering September well above the loan rate, farmers have felt immediate and significant price impacts from the lower basis. At some point, transportation availability will be a critical part of this season’s harvest.”

Looking at the 2004-05 supply and demand balance sheets, Gerloff says the September ending stocks level represents a large drop from projections earlier in the year. Lower yields, stronger demand, and a smaller old crop carryover stock combined to lower projected new crop stocks to 205 million bushels.

September 2004 ending stocks were projected to be 190 million bushels. However, October 2004’s update increased the projection to 405 million bushels when yields were updated to reflect a record crop, he says.

According to historical data, final new crop carryover stocks likely will range from 144 to 266 million bushels, says Gerloff. The lower number probably would mean prices above $6 — perhaps above $6.50 — while the higher number likely would result in LDPs, he says.

“If, however, the October USDA report confirms carryover stocks at or above the 200-million bushel projection, prices could fall to the $5.20 in the November contract. Similar carryover stock levels in previous years have resulted in prices below $5.”

Turning to the foreign situation, the combined soybean production of Argentina and Brazil has exceeded that of the United States since 2000, and that trend is expected to continue, says Gerloff.

“Their combined stocks, however, are three to four times that of the United States. A weak dollar and less expensive freight rates have helped to keep U.S. soybeans competitive in past years. This year, Argentina and Brazil both are expected to increase exports while increasing stocks. Foreign stocks are projected to increase by more than 100 million bushels over last year, to 1.44 billion bushels. This level of foreign stocks is more than double that of the 1998-99 crop year, with much of the increase coming from Brazil and Argentina.”

Brazil’s soybean production has more than doubled in the past 10 years while Argentina’s production has more than tripled, he says. While U.S. stock levels have been steady to declining, on average, both Brazil and Argentina have increased carryover stocks substantially, from a combined 271.6 million bushels in 1997 to a projected 1203.7 million bushels in 2006.

On the demand side, China has increased its imports by more than 900 million bushels since 1997, while imports into Japan, EU-15 and Mexico have been relatively constant, he says.